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IRS Makes Significant Changes to Correction Options Available for Tax Qualified Retirement Plans

The IRS recently issued Revenue Procedure 2021-30. In the Revenue Procedure, the IRS added several enhancements to the correction options available for qualified retirement plans. The Revenue Procedure also eliminated one correction option.
The complexity of qualified retirement plans and potential for qualification issues have caused the Internal Revenue Service to establish the Employee Plans Compliance Resolution System (EPCRS). The EPCRS contains a methodology for plan sponsors to correct potential plan qualification issues through self-correction, voluntary correction with IRS involvement or negotiated correction through audit cap. The availability of each of these programs is based on the timing,  or nature of the qualification error and the availability of prescribed corrections in the Internal Revenue Code and EPCRS program.
Self-correction (SCP) is available for the insignificant errors and many timely corrected significant errors if the plan sponsor has an IRS approved document and practices and procedures in place.  No IRS involvement, fee or sanction is required.
Voluntary correction (VCP) allows a plan sponsor to submit a fee and correction to the Internal Revenue Service for approval.
Audit CAP allows a plan sponsor that has been audited to correct an error and pay a sanction to the Internal Revenue Service.
As the nature and severity of the error increases, the involvement of the Internal Revenue Service increases as does any potential sanction. The EPCRS has proved to be a valuable tool in the identification and correction of qualification issues.
The EPCRS has evolved over a thirty year period. It has expanded to include 403(b) plans and certain self-employed plans. The Internal Revenue Service has recently issued Revenue Procedure 2021-30 containing an updated version of the EPCRS. The Revenue Procedure is generally effective July 16, 2021, but some provisions have special effective dates. Some highlights of new provisions in the Revenue Procedure are as follows:
  • The self-correction period for significant failures has been extended by one year to allow a correction period under SCP that runs until the last day of the third plan year following the plan year in which the failure occurred.
  • The expansion of the ability to make corrections by plan amendment under the self-correction program.
  • The elimination of the Anonymous Voluntary Compliance program effective January 1, 2022.
  • The replacement of that program with an anonymous, no fee voluntary compliance pre-submission conference procedure effective January 1, 2022.
  • The addition of several new rules for the correction of overpayments from the plan.
  • A provision that allows a plan sponsor to forego the correction of certain de minimis amounts below $250.
  • Effective January 1, 2022, sanction amounts under Audit Cap must now be paid through Pay.Gov.
The addition of an extra year to correct certain significant errors under SCP is welcome. This can potentially save Plan Sponsors the expense of a Voluntary Compliance Program formal filing. Likewise, the ability to self-correct certain failures through retroactive plan amendment under SCP has been expanded to allow more Plan sponsors to correct a plan through amendments that conform to the actual operation of the Plan.
It remains to be seen how the elimination of the Anonymous Voluntary Correction Program at the end of 2021 will impact the willingness of Plan Sponsors to apply for correction. There are still six months to apply under the existing program. Great care will have to be taken under the new pre submission conference option to prepare all available correction detail and strategy.
These changes will require analysis by any plan sponsor contemplating the correction of potential plan qualification issues.

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